Research and development, or R&D, is the main focus of drug manufacturing companies. To develop new drugs, these companies undergo years of study coupled with enormous investments. Merck (MRK) spent more than $8 billion on R&D last year to develop a stronger drug pipeline. The company currently has 44 drugs in its pipeline in different trial phases. It is currently building its presence in treating cancer patients and focusing on developing and improving its cancer drugs to grab opportunities in this market.
Partnership to develop ovarian cancer drug
Recently, Merck entered into a worldwide license agreement with AstraZeneca (AZN). In this agreement, AstraZeneca will manufacture, market, and look after all the clinical developments of MK-1775, an oral small molecule WEE1 Kinase inhibitor designed to kill tumor cells without undergoing the normal DNA repair processes. This drug is currently in phase IIa clinical trial in combination with chemotherapy agents for the treatment of patient with ovarian cancer. This will develop the immunity power of the cells and build strong anti-tumor properties, compared to chemotherapy alone. In this agreement, Merck will receive $50 million as an upfront fee and will be eligible for future milestone payments like sales-related payments and tiered royalties.
According to Merck's Senior VP, "We are pleased to enter this agreement with AstraZeneca to realize the potential of MK-1775 while we focus on advancing our later stage oncology programs, MK-3475 and vintafolide."
By signing the agreement with AstraZeneca, which has strong presence in oncology segment, it is expected to develop this drug to treat ovarian cancer patients more efficiently. We expect Merck will benefit from this agreement, and the royalty payment related to MK-1775 will give Merck the opportunity to develop its other cancer drug "MK-3475" that is currently in advanced trial stages.
On other hand, this worldwide license agreement with AstraZeneca will enable it to strengthen its oncology drug pipeline. With its strong distribution network and expertise, AstraZeneca will market and develop MK-1775 more efficiently. It is expected to demonstrate positive results in cancer patients treated with MK-1775.
According to Head of AstraZeneca's Oncology Innovation Medicines Unit, "MK-1775 is a strong addition to AstraZeneca's growing oncology pipeline, which already includes a number of inhibitors of the DNA damage response." He further added, "The compound has demonstrated encouraging clinical efficacy data and we intend to study it in a range of cancer types where there is a high unmet medical need."
In August 2013, AstraZeneca announced its intent to acquire Amplimmune, a specialized cancer drug developer for $500 million, which is expected to close by the end of the third quarter of 2013. This will help both AstraZeneca and Amplimmune develop new cancer therapies and both are optimistic on the potential of immunotherapy.
We expect this acquisition, coupled with the license agreement with Merck for MK-1775, will enable AstraZeneca to restructure its earlier clinical setbacks and build a stronger oncology drug pipeline.
Developing another cancer drug
Merck is very optimistic about its cancer immunotherapy program for lambrolizumab, formerly known as MK-3475, an anti-programmed death 1, or PD-1 drug, which is used in the treatment of melanoma. PD-1 molecules are an immune checkpoint found in white blood cells that enables cells to fight against tumors or cancerous cells. The company is primarily focusing on developing MK-3475 to treat melanoma patients more effectively in its trial phase. The company ran phase 1 trial on 135 melanoma patients with different doses of MK-3475, and 38% of the patients observed 30% reduction in their tumors cells. Based on the phase 1 result, this drug is in a phase II randomized trial in treating advanced level melanoma patients, who were previously treated with other therapies. In Phase II, it will compare the immunotherapy antibodies with chemotherapy, and in phase III it will be compared with Bristol-Myers Squibb's (BMY) melanoma drugs Ipilimumab and nivolumab on patients who haven't been treated previously. It is expected that MK-3475 success in the trial phase will help it emerge as one of the biggest sellers, enabling the company to build a strong presence in the oncology segment.
Its Competition in PD-1
Bristol-Myers Squibb PD-1 drug, "Yervoy", or "Ipilimumab", monotherapy was approved by the FDA in 2011 and is now approved in more than 40 countries for treatment of melanoma patients. Further, the company found prostate cancer as the major cause of death in men. It is constantly focusing on developing its Yervoy to be more efficient in treating prostate cancer patients. It aims to grab the growth opportunities prevailing from prostate cancer.
According to a survey, "Prostate cancer is the second most frequently diagnosed cancer and the sixth most deadly cancer in men. In the United States, it is estimated that more than 238, 000 men will be diagnosed with prostate cancer and more than 29, 700 will die from the disease in 2013".
On Sep 12, 2013, Bristol-Myers reported results for its phase III trial of Yervoy in previously-treated Castration-Resistant Prostate Cancer, in which Yervoy narrowly missed meeting the primary endpoint of survival compared to the placebo. However, its anti-tumor activities were able to attain some efficacy endpoints, and it was also able to control the disease after the treatment, preventing progression.
According to VP Bristol-Myers, "While we are disappointed that the primary endpoint of overall survival was not met, we remain encouraged that results in this advanced population support the potential role of immunotherapies for prostate cancer. We are committed to continuing our development of Yervoy in prostate cancer."
The company is very optimistic about Yervoy, and it is focusing on improving and developing this drug to treat prostate patients more effectively and attaining the efficacy and safety endpoints in their treatment.
On Valuation side
Expected Revenue (2013)
Expected EPS (2013)
Expected Sales per share (2013)
Sales per share (TTM)
Price-to-sales, or PSR
Source: Yahoo Finance
By analyzing the above table we see that Merck's stock is hovering around $47 per share, and as per the company's guidance, it is expected to post revenue of around $45 billion this year. Considering the same revenue guidance by the company and without undertaking any of its share-buyback plan we can expect revenue per share of $15.36 by the end of this year, which is higher than its trailing sales per share of $14.87. Looking at Merck's Price-to-sales ratio and comparing it with its sales per share, the stock is priced correctly. However, its forward PE is much lower than its trailing PE, depicting higher growth potential.
In its guidance, AstraZeneca expects a decline in revenue to $26.094 billion with EPS of $5.27 this year compared to revenue of $27.973 billion and EPS of $6.41 last year. However, we expect that after these recent deals the company may post higher revenue and EPS than its guidance. AstraZeneca is trailing at the PE multiple of 13.19 with forward PE of 10.59, and by analyzing it with the expected EPS, the company's stock looks good at the current price with a long term growth prospective.
Bristol-Myers' forward PE of around 23.29, which is 60% lower than its trailing PE, represents higher growth potential in the future for the company. It is expected to generate revenue of $16.5 billion this year. By analyzing its strong Price-to-sales ratio of 4.88 with its sales per share, we expect there Bristol-Myers is also a good long term investment opportunity that may generate strong returns for investors.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.